Black Diamond Group Ltd

TSX:BDI

Earnings Call Transcript 2018-Q1

[Operator]

Good day, ladies and gentlemen, and welcome to Black Diamond First Quarter 2018 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.I would now like to introduce your host for today's conference, Keenan Killackey, from Investor Relations. You may begin, sir.

[Keenan Killackey]

Good morning. My name is Keenan Killackey, Investor Relations analyst for Black Diamond Group. At this time, I would like to welcome participants to Black Diamond's First Quarter 2018 Results Conference Call with Chief Executive Officer, Trevor Haynes; and Chief Financial Officer, Toby Labrie. We are also joined today by Chief Operating Officer, Modular Space Solutions, Troy Cleland; Chief Operating Officer, Workforce Solutions, Mike Ridley; and Executive Vice President, International, Harry Klukas.After our formal remarks, there will be a question-and-answer session. [Operator Instructions] Please note that while talking about our results and answering questions, we may make forward-looking statements. These statements are subject to known and unknown risks, and future results may differ materially. The management will also be discussing non-GAAP financial measures in today's call, including adjusted EBITDA and net debt. For more information about these topics please review the sections of Black Diamond's first quarter 2018 management's discussion and analysis entitled forward-looking statements, risks and uncertainties and non-GAAP measures. This quarter's MD&A, news release and financial statements can be found on the company's website at www.blackdiamondgroup.com as well as the SEDAR website. Dollar amounts discussed in today's call are expressed in Canadian dollars and are generally rounded.I will now turn the call over to Trevor Haynes to review the quarter.

[Trevor Haynes, Chairman, President & CEO]

Good morning, and thank you for joining. Results for the first quarter of 2018, showed a substantial improvement from the same quarter last year with adjusted EBITDA increasing 87% to $8.6 million. We have continued to make progress on our strategies of improving the balance sheet, repositioning our workforce business and diversifying our revenue streams through the expansion of the Modular Space Solutions business.This progress is reflected by an 8% reduction in net debt during the quarter, a 40% increase in MSS revenue and a 137% increase in Lodging revenue with our WFS business, partly as a result of the company's repositioning of assets in the western Canadian shales.During the first quarter, Modular Space Solutions' high margin recurring rental revenue grew by 11% from Q1 '17, with fleet additions in British Colombia, the U.S. and strong activity in Ontario. Sales revenue was strong compared to Q1 '17, due to normal quarter sales of fleet assets in addition to executing on a growing custom sales pipeline. Although, there has -- although, there was some positive growth in many of our markets, the Modular Space business in Alberta experienced meaningful year-over-year utilization and rental revenue deterioration due to the return of assets from completed major reserves projects.The lower activity levels for resource development has muted new demand in this market, however, the Alberta fleet has already seen modest recovery in utilizations from its mid-quarter lows. We anticipate gradual improvement to continue in this Alberta marketplace and the business should therefore display the strong performance and steady growth that we have been experiencing in the British Columbia, Ontario and U.S. markets.Management is also focused on growing the complementary revenue streams associated with the MSS business through value-added products and services as well as custom sales.We have been working to add further value to our customers by offering a more comprehensive solution that includes furniture, steps and landings, utility services, maintenance programs and many other. These revenue streams contribute margin to this business without additional capital requirement.The rapid adoption of permanent modular construction methods in the United States is providing substantial opportunities for the custom sales team, resulting in a growing bid log, which should lead to higher sales revenues in the second half of this year. Scaling up the MSS business brings additional profitability and remains a primary objective of the company.On a year-over-year basis, the MSS platform is substantially larger due to the transformative Britco acquisition in late Q1 '17. The scale of this business is providing Black Diamond with a stable base of recurring cash flows, while we reposition our workforce fleet to capitalize on potential upcoming large capital resource projects in Western Canada.We have continued to execute on our strategy of absorbing underutilized rental assets in the strategic way placed open lodges in high activity locations.The company's lodges generated substantially higher revenues during the first quarter, and while we will experience some typical seasonality in the lodging business in Q2, we anticipate there is improving activity supporting occupancy into the second half of the year with added demand from turnaround work, oil and gas development and pipeline activity.Subsequent to the quarter, the company converted a customer-dedicated camp in Northeast B.C. to an operated open Lodge, and in the process expects to receive an $11.2 million cash payment from the customer in exchange for the responsibility for future dismantle of this facility.The proceeds from this transaction were not related to the cancellation of any term remaining on the original rental contracts. This 1,244 room facility, Sunset Prairie Lodge, has 8 remaining years on the crown lease and is expected to service demand for accommodations from pipeline construction, oil and gas development, general construction and other in this region. A lodge is also positioned to benefit from an increase in natural gas drilling in the high likelihood that LNG export terminals are developed off the Canadian West Coast, management expects occupancy throughout 2018 and beyond.The cash received, as a result of this transaction will initially be applied to further reducing the company's debt levels.Management maintains a high level of confidence in the value of the company's large fleet of private washroom accommodation assets, and with the growing potential for significant resource development projects in the near future, such as LNG Canada, the business is poised to capitalize on these opportunities as they arise.The company's U.S. wellsite accommodation business performed significantly better in Q1 '18 than during the same quarter last year. With assets distributed evenly across Texas, Colorado and North Dakota and each one of those regions experiencing higher activity, utilization more than doubled or rates are also seeing increases.In Australia, improving economic conditions are supporting increases in resource development spending and we are seeing this reflected in demand for our workforce accommodation assets there. Additionally, demand for space rentals and education assets in this market is quite strong. As infrastructure development and general construction spending reports increasing utilization levels. Management continues to prioritize a disciplined approach to capital spending. Through the first quarter, sales of underutilized asset succeeded gross CapEx, including maintenance capital of $100,000.As MSS fleet has come off-rent in Alberta, we've been able to satisfy strong demand for additional units in the much more active British Columbia market. Transferring nearly $6 million in net asset value since the beginning of '17. With an expectation for further significant debt repayment in Q2, there should be more financial capacity and flexibility to accelerate growth capital expenditures into our healthier markets.The company's newest business LodgeLink, is proving to be a useful platform for customers and suppliers, as this digital marketplace booked over 30,000 room nights and generated over $6 million in gross revenue during the first quarter. The system now has over 130 properties listed, representing nearly 25,000 rooms of capacity and has served proximately 130 distinct corporate customers. Overall, we are pleased with the performance of the business. Despite continued lack of major resource capital projects in Western Canada, we have made significant progress in stabilizing our revenues, improving the balance sheet, repositioning assets and innovating with new products and facilities.I'll now turn the call over to Toby for some further details on the first quarter financial results. Toby?

[Toby Labrie, Executive VP & CFO]

Thanks, Trevor. Total adjusted EBITDA for the quarter was $8.6 million, an 87% increase from Q1 '17, which contributed to a $9.2 million decrease in net debt from Q4 2017 to Q1 2018.Adjusted EBITDA for Modular Space Solutions was $3.8 million, up 73% from the same quarter last year. This was due to a full quarter of contribution from Britco, combined with higher utilization levels of 66% compared to 64% in the first quarter of 2017.Used fleet sales and custom activity -- custom sales activity were also higher during the quarter.Workforce Solutions adjusted EBITDA was $7.1 million, up 25% from the comparative quarter. This was due to a number of factors of primarily stronger occupancy levels of Sunday Creek Lodge, Smoky River Lodge and Little Prairie Lodge.In addition to this, wellsite utilization increased by 39 percentage points, and revenues from Australia, increased 47% since the first quarter of 2017.During first quarter, the $3.2 million of sales of have underutilized fleet assets, exceeded capital expenditures of $1.3 million nearly all of which was allocated growth of the MSS business.We continue to advance our core strategy, the diversification and debt production with the intent of reducing the risk on the business, while enhancing our base to diversify recurring cash flow.We are encouraged by the growth, we've seen in most of our MSS markets while resource development activity in Canada, the U.S. and Australia is also showing signs of improvement. The company retains the sizable fleet of well-maintained mobile private washroom dormitories in our Workforce Solutions business. That positions us well for potential catalyzing projects, such as West Coast LNG development or for the gradual recovery in large capital projects in Western Canada.Beyond this, the Business has excess capacity of high-quality underutilized fleet in Alberta, that the company is selling at reasonable margins over-net-book value to fund the purchase of cash flow producing assets in our diversified MSS business. We believe the momentum of this strategy will accelerate through 2018 and will help us to advance the core strategies of debt reduction and diversification of the business.Operator, we're now ready for questions.

[Operator]

[Operator Instructions] Our first question comes from Brian Pow of Acumen Capital.

[Brian D. Pow, VP of Research & Equity Analyst]

Trevor, can you just go through those numbers again for LodgeLink in terms of, how many customers and rooms and all the stuff you're representing?

[Trevor Haynes, Chairman, President & CEO]

Yes. The numbers, again, for LodgeLink are 30,000 room nights of bookings in Q1, representing revenue of over $6 million, 130 properties listed, so those are distinct camps or lodges. And those camps or lodges represent total capacity by number of rooms of just about 25,000. We're seeing this trend continuing, so continuing to add capacity onto the marketplace and to improve the marketplace itself. So Q1, we felt there was a good proof of concept and the challenge for us is to continue to expand that platform in terms of volume and volume of trade across that marketplace. And then to expand the geography that -- and different industry segments that, that platform serves. So early days in terms of finding this type of product to the Workforce marketplace but it appears that there is good supply and demand dynamic which encourages us to continue.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay. Is there -- has there been any competitive response, would be my first question and secondly what sort of, say, headcount and, sort of, capital commitment are you making to the business?

[Trevor Haynes, Chairman, President & CEO]

Just to take those in order, there are some sites out there that offer to book. Our model doesn't require a subscription fee and you can book through the system, and we have a dedicated support team, which differentiates from some sites that simply list or where there is the ability to electronically book within one dedicated system, one lodging operator, for example. So we think in terms of the scale and sort of the breadth of the service that's provided within LodgeLink that's reasonably distinct. But digital marketplaces are not -- what's cutting edge about this is the application into our industry and then various services that we're building into that platform. So with regard to headcount, we have a bit of a hybrid. Our core services group continues to support this business for all of the nondirect commercial aspects and from a commercial aspect, I think, we've got about 6 dedicated employees full-time. Capital spend is, in fact, not that great, because the core product itself is the only piece we invest in. So the development of the technology and the various features that we add on to the site. So capital to this point has been light, I would suggest, a rough marker over the last year and half we've have been working on it is perhaps $1 million.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay, great. And now just sort of changing directions. You were successful on some asset sales in the quarter, $3.2 million is what Toby indicated. Have you got a target for the year in terms of how much you want to sell?

[Trevor Haynes, Chairman, President & CEO]

Of course, we do. But we've not released that. If you look back over the years, the sale of fleet in a asset management business is a recurring item. And so when we report the sale of fleet, part of it is...[Technical Difficulty]

[Operator]

Ladies and gentleman, please stand by.

[Trevor Haynes, Chairman, President & CEO]

Sorry about that. We seem to have lost connection. Anyway to -- for your question, Brian, and that was, I think, we have pretty much completed the response of the 30,000 of room nights booking, just over $6 million, 130 distinct properties, 25,000 rooms, and we have a small dedicated team of about 6. Oh and on to used sales, correct. Yes, in the normal course of our business, used sales occurs for various reasons, customers would prefer to own versus rent. The unique target this year is where we have determined that we want to adjust our portfolio with regard to our Workforce business primarily in Western Canada. And in an orderly way through various end markets to reduce our fleet count in certain categories, specifically, the higher density dormitories. And I think you'll see a fairly healthy cadence of that as we move through the year.

[Toby Labrie, Executive VP & CFO]

And what's -- Brian, Toby here. What's encouraging as well is, in the same vein of putting some of that late in capital to work in cash flow producing assets, as we mentioned the capital requirements in -- for us in our MSS business in British Columbia continue to increase, and we've been satisfying a lot of that through fully transfers from some of our underutilized assets in Alberta. And so we've transferred since the Britco acquisition over $6 million of fleet from Alberta to BC on rental projects and we're also seeing sales opportunities there as well.

[Brian D. Pow, VP of Research & Equity Analyst]

All right, that's great color. Just looking at some of your commentary, you're pointing to improving your utilization and rates. As we sort of model sort of the organic growth through the year, how much should we sort of think is coming from like sort of utilization, and how much should we think is coming from your ability to push prices?

[Trevor Haynes, Chairman, President & CEO]

It's different based on the different parts of the business in the different markets. Where we have some price traction and recovering price, typically follows after utilization rises and it takes time. We're seeing some ability in our U.S. wellsite accommodation business where activity is quite strong as you would know in places like West Texas. So there's some pricing gains there, certainly in our active markets in Ontario and British Columbia, prices gradually are increasing more in line with inflation, I would suggest, Troy. And we've got some traction in Australia where the market has tightened up. The area where the first order of business is utilization versus pricing is within our Modular Space fleets here in Alberta. And also in our workforce business, we're not anticipating Workforce business unlike further deterioration in rates, but at this point, we're looking for increasing occupancy and increased utilization as the main driver for improvement in that business.

[Troy Christopher Cleland, Executive VP & COO of Modular Space Soultions]

Yes. And just to add to that, the pipeline of activity has definitely improved in Workforce. The worst is behind us. And with the potential projects that are looking strong coming down like LNGC all indications moving certainly to a positive FID, that will take advantage of our, I think, likely the largest fleet of executive dorms, private washroom dorms, so we're positioned well. There's good upside with that. As well as our open Lodge in the Northeast as LNGC goes activity, which will certainly benefit occupancy in that region. So we're excited about that project moving forward.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay, great. And then just curious what exposure [indiscernible] or will have to Kinder Morgan. Is it something that you'll be impacted either way? Positive or negatively? If [indiscernible]

[Trevor Haynes, Chairman, President & CEO]

So activity in the marketplace is good overall. That pipeline -- a good part of the routing goes through more populated areas. So the cap requirement is lighter and more to the northern part. There's a reasonable chance, if it goes ahead, that we will participate by supplying the equipment, more so than through our turnkey operated lodges and it may has some pull-through effect on some of the locations for processing infrastructure for our Britco platform in particular. I think what the stronger readthrough is getting more activity from our customers broadly in whether it's oil or gas and solving egress problem we view as positive on the construction of that product itself. But indirectly in improving activity in the Western Canadian marketplace. As differentials come in and our customers have this ability of getting the product to market and develop more.

[Brian D. Pow, VP of Research & Equity Analyst]

Okay. Actually, I had one just last question. You spoke, sort of, to little further ahead as you get your balance sheet more in order that you can sort of start prioritizing some growth capital opportunities. Would you see your growth opportunities coming strictly, sort of, organically or are you still in the market to do acquisitions? Or would you be back in the market doing acquisitions?

[Trevor Haynes, Chairman, President & CEO]

We have -- parts of our platform that had really strong demand and utilization in branch locations or even regions is quite high, and so the lower risk capital deployment as we begin to accelerate would be into those markets where we have better control and line of sight of capital going direct to cash flow. So I think that's where you would see us begin. That being said, we have been transactive over the years and we certainly look at what's in the marketplace, but near term, you would see us building up our organic growth and in a very disciplined way to ensure that we get the ROI hurdle with very low risk. And so one thing to highlight and we try throughout the disclosure and on the call today is our line of sight in terms of our debt levels coming out of Q2. So significant paydown in Q2 of debt, which brings us within the range that we're targeting and allows us to use the free cash flow on the business or proceeds from sale of asset to fund that growth CapEx, the organic growth CapEx. So I believe, we're going to get to those targets by the end of Q2 and then you'll see the platform beginning to show growth in the subsequent quarters. So we're very focused on that. And we are on track. So that question of where the CapEx go, is very appropriate for where we believe the platform is getting to here.

[Operator]

At this time, I would like to turn the call over to Mr. Trevor Haynes for closing comments.

[Trevor Haynes, Chairman, President & CEO]

Thank you. And thank you, everybody for joining for this morning's call. Have a good day.

[Operator]

Ladies and gentlemen, thank you for your participation in today's conference. You may disconnect, have a wonderful day.